Thoughts on two more companies from the ICR conference; These three regions comprise 50% of world GDP; Edwin Dorsey thanks Bill Ackman
1) Greetings from the annual Consumer Electronics Show in Las Vegas!
I flew to Vegas late last night from Orlando to spend the day here so I can see – and share with my readers – the latest technologies (more on this in tomorrow's e-mail – stay tuned).
Yesterday was the second day of the ICR conference, where I heard the management of another half-dozen companies tell their stories – many of which I'll discuss in the next week.
Let's start with Container Store (TCS)...
I saw management's presentation at the ICR conference a year ago and warned my readers that it was a value trap – and, sure enough, it got cut in half:
Then the stock plunged another 18% yesterday to $1.90 per share – giving it a market cap below $100 million – after the company pre-announced weak sales during the holiday season. Sales are now expected to come in at $214 million versus guidance of $220 million to $225 million, with "profitability for the quarter to be negatively impacted by the sales shortfall."
As I looked up revenue and operating income over the past 15 years, I expected a total freefall – but that has only been the case for the past 18 months:
So this isn't a full-scale collapse like Bed Bath & Beyond was, but it's hard to see how management can turn this around. At the end of the day, I just don't think there's a reason for this business to exist...
2) Moving on, I was very interested to see the presentation from Denny's (DENN)...
I owned the stock in 2003 when it traded well below $1 per share amid that year's burger wars – the entire fast-food sector was way oversold, so I also owned McDonald's (MCD), Yum! Brands (YUM), Jack in the Box (JACK), and CKE Restaurants at the time.
As you can see in this chart, DENN shares did very well, rising to $5 within a couple of years:
The stock closed yesterday at $10.59 per share – a level it first reached in 2015 – giving it a $566 million market cap. It trades at 2 times revenue, 10.8 times enterprise value to EBITDA (EV/EBITDA), and 20.5 times earnings per share.
Denny's has 1,631 restaurants, most of which are franchised... and in 2023, the company opened 32 and closed 57.
Here are the slides the CEO presented yesterday at the conference, and here are the preliminary fourth-quarter results the company issued.
Interestingly, revenues have declined by nearly half in the past two decades, yet operating income actually grew:
This is because Denny's franchised many of its company-owned stores – giving up revenue, but earning larger, steadier profits.
You can see this in the cash-flow statement over this period, as operating cash flow is strong, while capital expenditures ("capex") have fallen (since franchisees, not the company, have to pay for most capex):
Denny's also returns cash to shareholders via large share buybacks:
The company issued a lot of stock to stave off bankruptcy in 2003 to 2005... but since the peak of 101 million shares in 2010, it has retired 43% to 57 million shares outstanding today:
So is Denny's a buy?
No. I love franchise businesses... But if I'm going to pay 20 times earnings, I need to believe there's going to be growth – both in units and same-store sales.
That said, the stock will likely do fine – just as Warren Buffett has no doubt done well with his Dairy Queen acquisition.
3) From this post on X, here's a random factoid of the day: These three regions comprise 50% of world GDP (I wouldn't have expected California to be excluded!):
4) Here's Edwin Dorsey of The Bear Cave newsletter with a nice post thanking Pershing Square's Bill Ackman for being the only high-profile investor to take the time to write back to him when he was a high school sophomore a decade ago:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.